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Monday, March 18, 2013

by Nomad

At the beginning of last year, before the presidential campaign had really gotten underway, Nomadic Politics reported that one of Mitt Romney’s high- dollar contributors to his Restore Our Future SuperPAC was hedge fund billionaire, John Paulson. Now it seems as though, Paulson might be considering leaving the country altogether. Bloomberg last week mentioned Puerto Rico as a possible new home. (His hedge fund, however, issued a denial of the story.)

Paulson belonged to an exclusive club of uber-wealthy Romney backers who, even before the Republican nomination, were willing to write a cool million check for Romney’s bid for the White House. What's a million between friends?Why, that's chicken feed for a man like Paulson, whose net worth, according to Forbes was almost $16 billion. (The year prior to the SuperPAC contribution he reportedly earned staggering 5 billion.)

But it was all for naught, in the end. Investing in Romney proved to be an expensive proposition with very limited returns. However, the opposite can be said of Paulson's investments during the economic crisis. Wall Street analysts say that Paulson became outrageously successful by betting on failure, from the collapse of banks to the mortgage crisis.

According to BusinessWeek in 2011, as the economy slowly improved, he learned the hard way that there wasn't as much profit investing in positive economic news.

He told the reporter:

“We became overconfident as to the direction of the economy and took a lot of risk.”

If the latest news is correct, Paulson won't be so bullish on America. In fact, he is considering taking his profits out of the country altogether as Bloomberg reported last week:

John Paulson, a lifelong New Yorker, is exploring a move to Puerto Rico, where a new law would eliminate taxes on gains from the $9.5 billion he has invested in his own hedge funds, according to four people who have spoken to him about a possible relocation.

Ten wealthy Americans have already taken advantage of the year-old Puerto Rican law that lets new residents pay no local or U.S. federal taxes on capital gains, according to Alberto Baco Bague, Secretary of Economic Development and Commerce of Puerto Rico.

With 1% of the population owning 40% of the wealth of the nation, a super-wealthy stampede to Puerto Rico could have negative consequences to the economy. After decades of squeezing the life out of the US economy, they are now trying to find a way to protect their loot.

Would such an exodus have any effect on the economy? Well, according to candidate Romney, hedge fund investors are job creators. In fact, there’s little empirical evidence to proof that claim. During George W. Bush’s presidency when the economy lost 700,000 private sector jobs, there was a boom in hedge fund investments. Some say that hedge funds actually cut jobs since it encourages corporations to reduce the labor force and to outsource to cut corporate taxes. So, some might just say, let them leave.

Winners and Losers

America’s loss is some other country’s gain. Puerto Rico can see some definite advantages to the enticement plan. As one source explains.

The local government [in Puerto Rico] is pitching investment managers like Paulson, who can often treat their salaries as capital gains, along with other wealthy Americans whose income is largely investment returns, on moving to the island, with the hope that their arrival will coincide with investments in real estate, more service consumption, and perhaps new businesses forming here.

But people like Paulson, Puerto Rico is a crafty escape from what they see as unfair tax burdens. There are some minor difficulties such as residency.

People taking advantage of the law must live on the island for 183 days a year, among other residency requirements, and depending on how strictly they are enforced, Puerto Rico may be more of a retirement destination for the super-wealthy than the kind of place where they operate a business.

Perhaps for Paulson, regulations like that are for the little people.

The island has a nice climate (Temperatures are moderate year round, averaging near 80 °F) with regularly-scheduled flights from New York, just 3 1/2 hours airtime from New York, 60 minutes from Caracas, and at only 4 days sailing from Atlantic ports in the U.S. and ports in the Gulf of Mexico.

Leave your tax burdens behind and come to sunny Puerto Rico!

And yet Paulson is likely to discover that Puerto Rico is no paradise, especially for a lifelong New Yorker, used to having the best of everything.

Sneak Peek?

If Paulson likes to cash in on economic failure then perhaps Puerto Rico is the best place for him.

Only last December, the nation’s debt status was downgraded to just above junk status and Moody’s Investors Service said that its outlook for Puerto Rico remained negative.The economy of the nation has been crippled by what some analysts have called “a never-ending recession.”

Puerto Rico struggles with an unemployment rate surpassing 14% in recent years and a per capita income about half the level of the poorest U.S. state, Mississippi. More than 80% of children in Puerto Rico live in high-poverty areas, according to one report.

In 2011, the U.S. Census Bureau released data from the 2011 American Community Survey, and numbers show that poverty in Puerto Rico has gone up, while income has gone down. As Puerto Rican economist Dr. Juan Lara states:

The Puerto Rican economy has been in recession for the past 6 years, and it has been the most prolonged and profound and severe recession in our history.”

While the crime rate is about average. homicide is also a major problem there. Puerto Rico's per capita murder rate is six times that of the U.S. as a whole and twice that of New York City. The homicide rate was so bad that governor Luis Fortuño was forced to deploy the National Guard to reduce the number of killings.

One reason for the high murder is the problem of drugs. Drug smuggling has become so rampant in the island nation that US officials call it “America’s third border.” And residents have little reason to expect help from the local police. Back in 2011, the Justice Department issued a stinging report about police corruption, saying:

“far too many P.R.P.D. officers have broken their oath to uphold the rule of law, as they have been responsible for acts of crime and corruption and have routinely violated the constitutional rights of the residents of Puerto Rico.”

Entrenched corruption is a major problem in Puerto Rico, according to the FBI field office in San Juan, which two years ago arrested more than 100 Puerto Rican law enforcement officers and other public servants on charges of colluding with drug traffickers.

That’s not necessarily bad news for a man of Paulson’s means. Should Paulson decide to move, he would find his political contributions to be much more effective there than they were in the last election. There will be lots of compliant politicians eager to bend over backward to please.

However, Paulson might learn the reason why it is the only place in the world where the option 'None of the Above' has won an election, (During the 1998 referendum that option got over 50% of the votes.) That says a lot about how the residents feel about their politicians.

Other Problems for Paulson

Even if you ignore the political and economic problems, a refugee like Paulson will still face some of other problems, namely the environment.

On September 29, 2010, the EPA approved a list of 593 instances in which a pollutant caused impairment in the PR water body that keeps it from supporting its designated use for drinking water, swimming and recreation, fishing, or other activities specified by the commonwealth. The most common pollutants causing impairment include pathogens, arsenic, and dissolved oxygen.

Exposure to air pollutants from large ships includes nitrogen oxides, sulfur oxides, and particulate matter and can cause respiratory illnesses, such as lung disease, asthma, and heart disease. The Port of San Juan in Puerto Rico moves approximately 11 million metric tons of goods on nearly 3,800 vessel trips annually.

Well, that's not a pleasant picture. Air you can't breath and water you can't drink. I guess he'll have to buy them. On the other hand, there is one major selling point.

Paulson (and others like him) can view first-hand the effects of a hopelessly shattered economy. He will be able to see what happens when a country, with so much potential, utterly fails. What happens to a country when its infrastructure is in decay and nobody wants to repair it. He will be able to reflect on what happens when concerns for the environment take a back seat to unregulated exploitation. In short, it will be a sneak peek at what America could easily become in a decade, thanks in no small part to the 1% that has decided to avoid paying taxes at all costs. (If Romney had won, as people like Paulson banked on, we would be a little further down that road.)

All of these oligarchs will soon realize why so many the island residents have left Puerto Rico to the land of opportunity.

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